Key Takeaways From July’s Strong Jobs Report

The response to the news was decidedly bullish, with a diversified group of names like Bank of America Corp (NYSE:BAC), Netflix, Inc. (NASDAQ:NFLX) and Kraft Heinz Co (NASDAQ:KHC) each up more than 4% on what likely would have otherwise been a lethargic, summer Friday trading session.

The news? A jobs report that ended up being much healthier than expected, forcing most investors to rethink just how strong the economy may or may now be. More specifically, the strong jobs report for July has forced the market to reconsider when the next rate hike from the Federal Reserve might be imposed.

Traders weren’t indecisive about their conclusions either.

A Head-Turning Jobs Report

According to the Bureau of Labor Statistics, last month, the nation created 255,000 new jobs. That wasn’t enough to push the unemployment rate down from June’s reading of 4.9%, but compared to the 185,000 new jobs economists were expecting last month in addition to a slight increase in wages and the number of hours worked per week in July, last month’s jobs report could be considered a significant victory for the economy.

Payroll growth, unemployment rate

But how does an unaffected unemployment rate count as a victory? Because, the number of people working still increased, and the number of people who see enough hope to at least bother wanting a job (i.e. there’s a chance they might actually get one) is on the rise. That optimism in itself is telling.

The impact? With the jobs picture looking better — and that being one of the tenets of the Federal Reserve’s interest rate plans — investors were quick to change their expectations for a Fed rate hike from later to sooner.

The proof of the premise lies in today’s action from the bond market. Long-term treasury yields jumped more than 2% to a rate of 2.3%. Conversely, bonds and bond-related instruments like the SPDR Lehman Long Term Treasury ETF (NYSEARCA:TLO) lost ground. TLO stock fell nearly 1% on Friday, rekindling a reversal of rising bond prices and falling bond yields that first materialized in early July.

Yields, treasuries

If the market’s new assessment of the Fed’s timetable and plans is right, bonds are no longer a compelling trade, which in turn makes alternatives like gold and stocks the better place to be.

And sure enough, stocks were up today — it wasn’t just BofA, Netflix and Kraft-Heinz. The SPDR S&P 500 ETF Trust (NYSEARCA:SPY) was up a solid 0.77% today as well, as traders migrated out of bonds.

The philosophy may not bear as much fruit as many are presuming, however.

While the Fed remains pressured to keep inflation in check by raising interest rates before prices soar out of control, the value of the U.S. dollar generally moves in tandem with U.S. interest rates … and the greenback is already uncomfortably deep into “too high” territory.

That challenge was made even worse by virtue of today’s 0.4% rise from the U.S. Dollar Index. It’s up a full percentage point over the course of the past three days [a lot, for a currency], and back in an uptrend that got started in early May.

U.S. Dollar Index

Problem: The unusually-strong U.S. dollar is making it very difficult for U.S. multinational companies to conduct profitable business overseas.

The aforementioned Kraft Heinz, for instance, posted sales that would have been 4.5% better were it not for the strong dollar. Moreover, that figure doesn’t even count business not won in the first place because of the overly inflated greenback.

A stronger dollar also pushes the price of commodities like oil lower.

And therein lies the rub: Strengthening employment is good for a consumer-oriented U.S. economy, so much so that wage-growth may well inspire inflation the Fed will attempt to quell. The U.S. dollar will follow suit though, crimping earnings of U.S. businesses serving overseas customers, while at the same time pushing down oil prices for an energy sector that’s already been beaten up by weak crude prices.

Bottom Line

In too many ways, the strong jobs report for July creates the very situation investors have revolted against — in the form of a selloff — several times since 2014. That is, the prospect of a higher Fed fund rate is seen as a grave risk for this fragile economic recovery.

This time is different, though.

Those are famous last words, of course, but true right now all the same. This time, today, it looks like investors have come to grips with the notion of choosing the lesser of two evils. Between inflation and rising borrowing costs, the market is saying rising borrowing costs and the subsequent strong dollar are survivable, while mounting inflation may not be.

The stock market’s bullishness only makes a bad valuation problem worse, but with commodities and bonds offering little in the way of upside, what’s the option?

Now, let’s see how long investors hold that opinion.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

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